The nest egg strategy - How to use property to live a richer retirement

Many Kiwis invest in property to fund their retirement.

But with the cost of living going up, many investors may wonder: “how much money do I actually need to see me through retirement?”

You might also be thinking, “how many properties do I need? And how do I use these properties to sort my retirement?”

When planning retirement, there are 2 strategies you can use:

a) The Golden Goose strategy. This is where you buy high yielding properties that generate a passive income

b) The Nest-Egg strategy. This is where you sell your properties and live off money you get from selling.

Both are valid retirement strategies. But which one is right for you?

In this article, you’ll learn what the Nest Egg strategy is and whether it’s the right strategy for your retirement.

What is the Nest Egg strategy?

The Nest Egg strategy is more common than its alternative (The Golden Goose).

This is because you don’t need as many assets (properties) to make this strategy a reality for you.

Here’s how it works:

1. 1. Build up your assets through property

1. 2. Sell your properties when you are ready to retire

1. 3. Live off the big lump of cash

So, rather than reinvest your equity into high-yielding property for a passive income (like in the Golden Goose), you sell your investment properties, put the money in the bank (or a low risk fund) and live off the principal.

However, this does mean your money and assets go down over time.

You’ll be the wealthiest you’ll ever be when you first retire. But as you spend that wealth to live, your assets will gradually fade from that point.

By the time your retirement is over, your investment assets will be gone, but you’ll still have your family home to leave to your loved ones.

A simple example of the Nest Egg strategy in practice is KiwiSaver. At 65, you get access to your funds, and you can spend them over your retirement to supplement your New Zealand superannuation and your other savings.

How do I set the Nest Egg up?

In the Nest Egg, there are 2 key stages:

#1 Build your portfolio

#2 Sell your assets and manage your money

Stage 1 – Build your portfolio

In the first stage you need to build an asset base and grow your wealth.

This is when you actively buy property and build a portfolio.

You’ll primarily focus on investing in growth properties. These are properties that do a better job at increasing your wealth, even though the cashflow isn’t as strong immediately.

So that likely means, investing in townhouses and standalone houses in the major centres.

Having said that, it’s not unusual for these types of investors to purchase the occasional yield property to support their portfolio’s cashflow.

Once you’ve built your portfolio, you’ll hold these properties for the long term to achieve capital growth.

Stage 2 – Sell your assets and manage your money

The second stage is to turn your properties into cash so you can afford to live. This means selling the properties, paying off the mortgage, and then living off the left over funds.

In practice, you’re not going to put all your properties up for auction the day you turn 65, and job done.

Instead, you’ll likely only sell one property at a time, to release the money you need to live.

For instance, once you retire, you might start living off your Kiwisaver first. Once you’ve spent those funds, you might sell your first property at 67.

That could provide enough money so that you don’t have to sell your next property until you turn 75.

The benefit of this is that as you continue to hold your properties they will likely continue to increases in value.

So if you continue to hold a property from 67 to 75, you’ll likely be better off than if you sold everything up and put it in a term deposit.

Under the Nest Egg strategy, once you sell a property and release the equity, you’ll likely invest the money in a low-risk fund or term deposit.

This will allow you to get a small return on your money while you don’t need it.

But more importantly, it’ll do a better job at preserving the value of your assets. Whereas if you invested in a higher-risk asset (like shares), the value could fall in teh short term leaving you with less to live off.

These options for how you can best manage your lump sum of money, after you have sold your assets, is something to discuss with your financial advisor.

How many assets do I need?

Let’s say you want to live on $75,000 a year in retirement. How many assets will you need to create this income?

Let’s say, you and your partner are 45 and you want to retire at 65 – in 20 years time.

The average person in New Zealand lives to 82, which means you’ve got to fund 17 years of retirement living.

To follow the Nest Egg strategy, you would need to retire with $1.7 million (in today’s dollars) in debt-free investment assets.

This means assets other than your own home, and the money received after you sell your properties, pay the real estate agent and pay back the bank.

Yes, this sounds like a lot (and it is), but if you include New Zealand Superannuation in its current form, you’d only need $1.12 million.

This is because in today’s dollars, New Zealand Superannuation will make up about $34k per annum of your $75k – for a couple living together.

One of the positives of the Nest Egg is, unlike the Golden Goose, that asset figures does not have to be increased to factor in tax (more on this below).

Nest Egg strategy pros and cons

Even though many investors may find the Nest Egg to be the easier alternative to achieve, there are still pros and cons:

Pro #1 – Don’t pay tax

With the Nest Egg strategy, as long you are outside of the Brightline Test, you don’t have to pay tax, either on the capital gains you get from properties or your spending.

After all, because you’re living on (potentially) tax-free capital gains, you’re not earning anu income, so there’s no tax to pay.

Think about it this way. Let’s say you want to spend $75,000 a year in retirement. If you opt for Nest Egg, you can sell some shares or property to generate that $75,000.

And you’re done.

Compare this to the Golden Goose. In this strategy, you’re living off the rental income of your properties – so there is tax to pay.

So if you want to spend $75,000 a year using the Golden Goose, you need to earn around $100,000, because you still need to pay tax.

Pro #2 – Requires less money / assets

Because you’re not having to factor in tax, you require fewer assets to make the Nest Egg strategy work for you.

This can be beneficial for people who haven’t had the time, or lending, available to acquire all of the property they need.

Here at Opes, we often see investors start with the Nest Egg strategy and build up to the Golden Goose.

Here is a table to compare the two strategies. Depending on the numbers you use, you might require 30–50% more assets if you take the Golden Goose approach as opposed to the Nest Egg approach.

Con #1 – You need to guess when you’ll die

The downside to having a finite amount of assets that you’ll live off in retirement if you need to take a “best guess” for how long these assets need to last.

So you need to guess how long you’re going to live for (not a great topic for conversation).

In other words you need to know (roughly) how many retirement years you have ahead of you, so you can make sure you have enough money to retire on.

The average Kiwi lives to 82. However, as healthcare gets better, people are living longer.

So, often people will factor in living til 90 within their retirement plan. That means it they do live longer, they won’t run out of money later on in life.

Similarly, you should also consider your ethnic background when running the numbers.

Asian men tend to live 5.1 years longer than the average male.

So if you are of Asian decent, you are statistically more likely to live longer, so will may need more money in retirement.

This is where the Golden Goose has an advantage, because the passive income doesn’t have an end date. You’re living off assets that you haven’t sold.

Con #2 – Your money will eventually run out

Because you’re living off your assets under the Nest Egg strategy, eventually your assets will run out.

If you live longer than you planned, you’ll spend your final years just living off government superannuation.

Con #3 – Less inheritance for your children

One reason some property investors like the Golden Goose strategy is that it creates inter-generational wealth.

Because you’re not selling your assets (you’re just living off the income) the value of your portfolio is preserved. That allows you to pass this on to your family as inheritance.

That’s not the case with the Nest Egg. Under this strategy you’ve sold and spent your investment assets.

You’ll still have your family home to pass on to your children. But, it will be less than the Golden Goose.

For some investors this is a big drawback of the Nest-Egg strategy.

Though some investors think the other way. Leaving an inheritance isn’t a big concern for them, and they want to spendvall their money before they go.

Who is the Nest Egg right for?

The Nest Egg is a great option for people who plan to retire at 65 or later, and who plan to live to 80–90.

That’s because you’ll have 15-25 years in retirement. And it is realistic to build enough assets to cover your spending over these years.

Also, because it doesn’t require as many assets, it is also a good fit for people who have a shorter runway into retirement (7-15 years).

That’s because the later you start building your assets, the harder it gets. So if retirement is not far off for you, the Nest-Egg will likely be more achievable than the Golden Goose.

Similarly, if your budget (or your bank) stops you from building a large enough portfolio, you might decide to go for the Nest Egg strategy, for the same reason.

Who is the Nest Egg wrong for?

However, if you plan on retiring earlier than 65, then the Golden Goose might be the better option.

Let’s say you want to retire at 55 and plan to live to 100. It would be a massive task to build enough assets to cover 45 years of spending under the Nest-Egg.

Because of that, the Golden Goose will require fewer assets, and will be the better option.

Next steps: How do I get my Nest Egg strategy underway?

If at the end of this article you feel Nest Egg is the right strategy, and the right fit, for your situation your next step is to book a Portfolio Planning Session with a property partner from our team at Opes.